Philip Clarke, Chief Executive: "The announcements made today are natural consequences of the strategic changes we first began over a year ago and which conclude today. With profound and rapid change in the way consumers live their lives, our objective is to be the best multichannel retailer for customers. Our plan to 'Build a Better Tesco' is on track and I am pleased with the real progress in the UK.
We have already made substantial improvements to our customers' shopping experience, which are starting to be reflected in a better performance. We have set the business on the right track to deliver realistic, sustainable and attractive returns and long-term growth for shareholders. The consequences are non-cash write-offs relating to the United States, from which we today confirm our decision to exit, and for UK property investments which we will not pursue because of our fundamentally different approach to space. We have also faced external challenges which have affected our performance, notably in Europe and Korea. Our focus now is on disciplined and targeted investment in those markets with significant growth potential and the opportunity to deliver strong returns."
It has been an important year for the Tesco Group, with challenges and opportunities in many of the markets we operate in. Some of these formed a core part of our plans for the year - such as our investment to get the UK business back on track; some became more prevalent throughout the course of the year – such as the severity of the impact of regulatory restrictions on opening hours in Korea, and the deteriorating economic conditions and the consequential impacts on consumers in Europe. Despite these challenges, we have taken action throughout the year to better position the Group for the future. In the last twelve months, we have:
- Announced and made progress on our plans to ‘Build a Better Tesco’ in the UK
- Launched a strategic review of Fresh & Easy in the United States
- Taken a more measured approach to our growth in China
- Successfully completed our work to establish Tesco Bank on our own platforms
- Exited Japan
We have announced further action in two areas:
First, based on our progress so far with our strategic review of Fresh & Easy, including the indications of interest received from third parties, we have confirmed that the outcome of the review will be an exit from the United States. As such, Fresh & Easy has been treated as a discontinued operation within these results. Whilst the process is ongoing, and as such the form and final financial impact of the exit is still to be determined, we have written down the assets of the business and booked a provision for ongoing liabilities. The total impact to profit after tax is £1.2 billion (approx. €1.4 billion), including £169 million (approx. €196.7 million) trading losses and £1.0 billion (approx. € 1.16 billion) non-cash items – predominantly the impairment of fixed assets and provisions for onerous leases.
Second, following on from our announcement in April 2012 that we would be reducing the level of new space growth in the UK going forward, we have carried out an in-depth review of our property pipeline. We have reviewed all of the schemes included in the pipeline individually, assessing their viability and potential to deliver an appropriate level of return on capital employed if built out. As a result, we have identified more than 100 sites – the majority of which were bought between five and ten years ago, at a higher point in the property cycle – which we no longer plan to develop and have therefore written their values down. In addition to a number of other provisions, including for the impairment of schemes which still can deliver an attractive return, but one lower than originally anticipated, this has led to a total one-off UK property write-down of £804 million (approx. €936 million).
The fundamental change in our approach to new space also has implications for our sale and leaseback program. Two years ago, we reviewed the program and announced a steady reduction in the level of divestments, in order to ensure that any property profits released were matched to the level of new profit created by development activities. Given that we have significantly reduced the amount of these activities going forward, we believe that it is appropriate to accelerate the scaling back of the sale and leaseback program, such that it is unlikely to make a material contribution after the next few years.